Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/324826 
Year of Publication: 
2025
Series/Report no.: 
Working Paper No. 2025-5
Publisher: 
Federal Reserve Bank of Atlanta, Atlanta, GA
Abstract: 
We show that the slope of the yield curve affects bank lending and economic activity through an "expected bank profitability channel." Using detailed banking data and term premium shocks identified via instrumental variables or event studies, we show that a steeper yield curve-when driven by higher term premiums rather than higher expected short rates-increases bank profits and loan supply. Intuitively, a higher term premium raises the expected returns from maturity transformation-a core banking activity- thereby incentivizing bank lending. This effect is more pronounced for banks with higher leverage. We interpret these findings using a simple bank portfolio model.
Subjects: 
predictive power of the yield curve
term spread
term premium
bank lending
bank profitability
interest rate risk
JEL: 
E44
E52
E58
G2
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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